Upstart Could Show Banks How to Get Clients to Willingly Pay Fees

The banking industry has struggled to get customers to pay for basic banking services. Leave it to nonbanks, however, to find a way to make it happen.

Aspiration, a Marina Del Rey, Calif., firm that offers online checking accounts and investment products, is getting a majority of its clients to voluntarily pay fees by letting them decide what they think is a fair price for its products.

Such customer participation is an intriguing concept, particularly at a time when the banking industry is experimenting with checking account models while looking at noninterest income as a way to offset hits taken from low loan yields.

"Banks are trying to innovate their checking accounts; we certainly are," said Ciaran McMullan, president and chief executive of Suncrest Bank in Visalia, Calif.

"Checking accounts have been boring and uneventful for a long time," McMullan said. "Now, from the biggest banks to Suncrest, we are focused on building core banking relationships. To do that, we have to get more creative."

At Aspiration, customers can choose to pay a fee on checking accounts, which the company calls a tip, ranging from nothing up to $6 a month. Over two-thirds of Aspiration's checking account customers pay a fee, said CEO Andrei Cherny, though he declined to provide the average amount paid. More than 90% of customers pay a fee for the firm's investment services.

"We think this is a [fairer] way to treat customers," Cherny said. "It just creates a different relationship with the customer — and they know we're working hard for them."

Aspiration attracts consumers who are willing to voluntarily pay a fee due to its customer service, added perks such as free access to any ATM worldwide and decent interest rates — 1% for balances over $2,500 — without "onerous and unfair fees," Cherny said. The company frequently waves overdraft fees, he said.

Currently banks are tinkering with checking accounts with various features and fee structures to satisfy customer needs, while at the same time generate noninterest income. Bank of America for instance, offers a checking account with a $4.95 monthly fee; the account doesn't have overdraft protection or checks.

"There are small but subtle changes banks are making to checking accounts," said Tim Scholten, founder of the consulting firm Visible Progress. "Margins have continued to compress. Mortgages have been really good source of fee income for some community banks but that business tends to be cyclical. If you see a drop there, that will put pressure on other areas of fees."

Questions abound, though. The biggest challenge would involve offering customers a choice where they would actually opt to pay a fee rather than defaulting to zero. There are no straightforward answers, industry observers said.

Other financial services firms have tried — and abandoned — that model, said Sam Maule, director and senior practice lead of digital and fintech at NTT DATA Americas. Green Dot initially used a pay-what-you-want model with its GoBank product but later switched to a flat monthly fee that it waives if certain requirements are met.

"I don't see this revenue model flying off the shelf," Maule said. "I think you get a group of early adopters that are technology savvy and want to have the latest and greatest and that will pay for these solutions."

An ala carte model might work better, allowing customers to select the features they want, such as paper checks, then charging a nominal monthly fee to cover the bank's expenses, said Lynn David, CEO of Community Bank Consulting Services.

"I can't see having the option to pay nothing," David said. "You're getting into giving away things that have a hard cost to the bank. Why would you do that?"

The $296 million-asset Suncrest has launched two checking accounts that provide consumers with options. Its free account pays 1.5% interest on balances up to $25,000 if the customer meets certain requirements; otherwise, interest defaults to a lower rate. A separate account has a monthly $5 fee and gives consumers access to a national database of discounts on products and services.

"People are prepared to pay, and the more savvy people understand it does cost money to provide these services," McMullan said. "I think people are willing to pay for something if the service is good, if all of the features are there that they need and those features work and if there is some kind of emotional attachment or other value added on."

Banks, especially smaller institutions, "can't afford to ignore the rise" of companies such as Aspiration, Maule said. Bigger banks tend to have more options, such as an ability to buy fintech firms, he said.

Radius Bank in Boston has taken that message seriously. Radius — Aspiration's processing bank — has also partnered with an online marketplace lender and a mobile payments firm, said Christopher Tremont, the $790 million-asset bank's executive vice president of virtual banking.

The bank, which has also collaborated on a rewards product that pays down student loan debt, could join one or two more partnerships in the next year, Tremont said.

Radius gets two to three offers a week about possible partnerships with new fintech firms, though it turns down the vast majority of those pitches. "At Radius, we have always been more about how do these two industries become friends rather than it being fintech versus the banks," Tremont said.

"I don't have a crystal ball" on how Aspiration's pay-what-you-want model will turn out, "but early on the signs are very promising," Tremont said. "It's about attracting a client base that is proving they will pay for good products and good services and compensate an organization for that."

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